JPY plunges as Bank of Japan remains very dovish

A dovish BoJ send the JPY spiralling to further weakness

• Bank of Japan remains dovish: The BoJ will take its time in considering any monetary policy changes
• JPY sharply lower: The JPY is being significantly sold-off on major forex today
• Equities are mixed: European indices start mixed after a tech-led rally on Wall Street. US futures are paring some of those gains.
• Mixed metals, oil consolidating: In commodities, gold and silver are a shade lower after a choppy session yesterday. Oil is still trying to build support.

The Bank of Japan remains very dovish

The Bank of Japan (BoJ) has maintained the level of its deposit rate at -0.10% and held the 10-year bond yield (Yield Curve Control) around zero.

This was as the consensus had expected.

However, there were some developments that markets have taken as being dovish, with the announcement of a protracted review into monetary policy adjustments.

A change in interest rate guidance

No longer will interest rates be kept at “current or lower levels”.

This has been replaced, as the BoJ will now:

“patiently continue with monetary easing”

A long review of monetary policy

The big news is that the BoJ will be conducting a review of monetary policy. 

Here is what the statement said:

“The Bank has decided to conduct a broad-perspective review of monetary policy, with a planned time frame of around one to one-and-a-half years.”

This is the BoJ very much taking their time on this. 

The last time they did a policy review, back in 2016 it took just over a month. This reflects the importance of such a decision to end decades of ultra-easy policy.

However, it also scuppers the idea that the BoJ will be adjusting yield curve control any time soon.

Changes to inflation projections

There have been some mild upward revisions to inflation projections.

The projections for core inflation for the fiscal years to March 2024 and March 2025 have been increased to 1.8% (from 1.6% previously)  and 2.0% (from 1.8%) respectively. 

Crucially, these are not above the BoJ’s target of 2%. 

This is significant as it suggests that although inflation is elevated now, it will not last.

Inflation will need to be above target for the BoJ to be tightening monetary policy in any meaningful way.

Market reaction has been very dovish

Markets have taken this move as being very dovish.

First of all, the lack of any imminent change to yield curve control has seen traders buying Japanese bonds.

The yield on the 10-year JGB has dropped more than -5 basis points (a big move for Japanese yields) to a four-week low.

This has significantly weighed on the JPY this morning. 

The JPY is more than a percentage point weaker against the USD, GBP and EUR.

A new phase of JPY weakness

There has been a significant reaction on JPY pairs today. It seems as though there is a new phase of JPY weakness that is developing in pairs such as USD/JPY and EUR/JPY.

USD/JPY

A huge bull candle today reflects the weakness of JPY.

If this candle is confirmed into the close it would suggest further upside will be likely now.

The price has broken above the earlier April high of 135.13 this morning. 

• If this break can hold then it would complete a strong bullish candlestick.
• It would also open a move towards the key resistance at 137.90.
• The daily RSI confirms the bullish move and is into the mid-60s. 

The 135.13 old resistance is now a basis of support and 133.00 is now a key higher low.

EUR/JPY

EUR/JPY has broken out. 

The top of a six-month trading range has been breached and this opens the next phase of strength for the pair.

Initially failing at the resistance of the range, the market has burst through this morning.

• The market has been trending higher for the past five weeks.
• It is now at its highest level since the peak of 149.50 in 2014, however, this is no meaningful resistance.
• Momentum is strong in the move, with the RSI rising again into the high 60s, so it still has upside potential.

We see good support around a breakout area between 147.70/148.60 to use any unwinding move as an opportunity.

However, with the strength of the candle this morning, if this moves holds, it would be a key move to open upside likely above 150 and beyond in due course.

Support and resistance levels for Forex, Commodities, and Futures/Indices 

Data: MT5/IXOne

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

All trading carries risk.